Ballmerisms and MSFT Gaps

Steve Ballmer, the brilliant businessman who left an amazing legacy of crazy at Microsoft, is finally leaving his post. Here are some of his most choice quotes from his tenure:

On iPods (2006): “No, I do not [have an iPod]. Nor do my children. My children — in many dimensions they’re as poorly behaved as many other children, but at least on this dimension I’ve got my kids brainwashed — you don’t use Google and you don’t use an iPod.”

On the music found on iPods (2004): “The most common format of music on an iPod is ‘stolen.’”

On Android (2011): “You don’t need to be a computer scientist to use a Windows Phone. I think you do to use an Android phone … It is hard for me to be excited about the Android phones.”

On open source (2007): “I would love to see all open-source innovation happen on top of Windows.”

Based on Mr. Ballmer’s departure, $MSFT shares gapped-up huge. The exit may be the start of a new chapter for $MSFT given that the market is clearly interpreting the news as a positive development. In order to interpret the current conditions, we can investigate similar circumstances in the past. When $MSFT had similar price shocks to the upside, how did it perform in the past? There are only two instances of $MSFT gapping higher than 3% in the last four years. Both of them retraced virtually all the gains after 10-days. This goes to show that even when the market interprets news as immediately positive, time can change the sentiment quite significantly.

> 2% Gaps

In order to get some statistical relevance I’ve expanded the criteria to gaps 2% or higher. Below is the pattern recognition output of all these instances. This is only to serve as a blueprint for $MSFT price behavior immediately after a price shock to the upside.

Note: The shaded area on the right of each curve denotes in-sample data (the day of the gap).

Our pattern recognition algorithm is searching for uniqueness and repeatability in order to identify the most dominant patterns. The most dominant pattern for $MSFT after a price shock event is to sell-off virtually all of the gain made on the gap. The second most dominant pattern is to consolidate for ~six days and then rally higher. Historically speaking, buying $MSFT after a price shock is not a great idea. But, if you believe that the Ballmer departure is a game changer and the stock destined to trade higher, you may still have some time to get advantageous prints (see Patterns 2). The future is not bound to the past and this may be an extraordinary event. Most of the time, knowing the precedence for these conditions is a big edge.

Below is the statistics table for those who appreciate the cold hard numbers.

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This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice.This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities.